MainStreet Bancshares, Inc. (MNSB) Q2 2026 Earnings Report, Transcript and Summary

Good afternoon, and thank you for joining our second quarter 2026 earnings webcast. My name is Jeff Dick. I'm the Chairman and CEO of MainStreet Bancshares, Inc. and MainStreet Bank. With me today is our Chief Financial Officer, Alex Vari; and our Chief Lending Officer, Tom Floyd. Chris Marinac, Director of Research for Brean Capital will join us at the end of the call today with his questions. This function is private, so what you write won't be visible to anyone else. We will address your questions at the end of the presentation. I'd like to take a moment to point to our safe harbor page that describes the context of forward-looking statements that we may make today. Please also know that we may use certain non-GAAP measures, which are identified as such within the presentation materials. The D.C. metropolitan area is much more than host to the federal government. With our major universities, tourism, data centers, world-class medical facilities and resident Fortune 500 companies, it continues to be a great place to do business. The Department of Government Efficiency recently wound down and left town. The D.C. market is sometimes perceived as not a good market, often in conjunction with concerns about politics. Yes, politics affects our marketplace, but in the last 22 years, the overall effect has been nominal in the community banking space. Since we opened our doors in 2004, we've experienced 5 presidential administrations, 4 D.C. mayors, 7 Virginia governors and 4 Maryland governors. We've also experienced economic and political pressures over that same period, including the Great Recession, where real estate prices actually held up strong inside the beltway. The budget control and sequestration period where community banks felt some secondary impact from hits taken by reduced government and corporate spending. During this period, specifically, we did have a couple of C&I relationships collapse, the COVID-19 and remote work period where community banks felt some impact from the hospitality crisis, but community banks didn't finance the big office buildings that felt the brunt of the shifting workplace culture. Washington, D.C. also didn't experience the great urban shift felt by so many of the large cities in the United States. But during this period, the liquidity for some of our borrowers was impacted by higher interest rates on projects that became protracted due to supply shortages, cost increases, work slowdowns and permitting delays. A few of those borrowers are having difficulty right now, and we are working with them. The overarching point for us is that we are in a solid, resilient market. By the numbers, the median household income is $135,089. The average home listing price is $831,000 and the median days on market is 30 days, still a seller's market. Anecdotally, I recently sold my house in 1 day with multiple offers. Federal Reserve economic data from December 2025 indicates that we have 684,000 government employees in the D.C. metropolitan area. Our market remains vibrant, and we continue to see good opportunities. We remain tuned in to local, national and global geopolitical activities. And when things happen, we determine the potential impact to our market and to our business strategy. Over the past 2 years, we've been hovering around that $2.2 billion total asset mark. We focused on smart balance sheet management, which has involved efforts to replace higher cost funding. We've made progress on that front, but we recognize that as a community bank in the Washington, D.C. market, our ongoing funding costs may very well remain a little higher than our peer group across the country. We opened our doors in May of 2004 as a Virginia-chartered community bank. We've been rooted in the Washington, D.C. metropolitan community now for over 22 years. Slide 7 shows that MNSB is a small-cap stock that trades on the NASDAQ Capital Markets Exchange and is listed on the Russell 2000 Index. As of quarter end, we traded at 94% of tangible book value, which is now at $26.30 per share. During today's presentation, you'll once again see directional consistency on our net interest margin, expense control and earnings. Asset quality remains good, and we are well capitalized. You will also see that we are working toward resolution for 8 performing relationships and 13 nonperforming relationships. In light of that, we've provided some historical references to show that our loss experience over time has been nominal as we work with our borrowers. Our goal is to continue that successful track record. At this point, I will turn the presentation over to our bank CFO, Alex Vari.

Thank you, Jeff. Slide 8 highlights our solid performance during the quarter. We increased earnings per share to $0.58 by growing net interest income over 4% during the quarter. It's encouraging to see our focus on earnings growth producing results. Our net interest margin improved to 3.53%, while our return on average assets and return on tangible common equity improved to 0.85% and 8.88%, respectively. With our third straight quarter of net interest income expansion and tight expense control, our efforts to improve core earnings quarter-over-quarter continue to bear fruit. We remain focused on our process and progress to drive higher returns for our shareholders. On Slide 9, you will see a diligent liquidity strategy that incorporates a secured line availability that has grown quarter-over-quarter. We continually manage our loan-to-deposit ratio to maximize our net interest income and have curated the security of over $810 million in available funding sources. Our available liquidity facilities cover 42% of our entire deposit portfolio, giving us flexibility to support our growth initiatives. On Slide 10, you will see we have effectively neutralized the interest rate risk on the balance sheet. This provides us with the ability to maintain margin stability regardless of the shifting rate environment. Our loan portfolio composition is well balanced between fixed and floating rate assets with 42% of the loan book at fixed rates, while 58% are floating rates or will reprice after 2 quarters. Moving to Slide 11, you will see our net interest margin has expanded again with our core and reported net interest margins converging at 3.53%. Just as a reminder, we have presented the core and reported net interest margins to exclude nonrecurring transactions and give you a view of how the bank has been performing overall. The portfolio has been resilient over the last year, which is consistent with the bank's history. On Slide 12, we outlined the bank's NIM over the last 22 years, demonstrating that the bank primarily operates a floating rate loan portfolio that yields a strong net interest margin throughout cycles. With one brief exception in 2009, the bank has consistently returned a net interest margin above 3%. Turning to Slide 13, you will see our second quarter net interest margin expanded from both increased yields on assets and lower cost of funds. To no one's surprise, market dynamics are now shifting, and we do expect additional deposit pressure in our highly competitive market. Looking at where our NIM is headed over the rest of the year, we are expecting funding cost pressures to increase slightly. We operate a short duration loan portfolio with funding duration that matches. With our projected funding offsetting loan reprices and a steady increase in average noninterest-bearing balances, we anticipate single-digit movement in the net interest margin through the rest of the year. Moving to Slide 14, which builds directly on the previous slide, you can see how our consistent risk premium translates directly into higher asset yields. This disciplined approach to credit pricing actively safeguards and enhances our net interest margin even in volatile yield curve environments. Our customers aren't just buying a transaction. They are paying for the quality and premium execution our team delivers. And on Slide 15, you can see that while we priced our assets to capture that credit risk premium, the actual loss experience over our lifetime is incredibly small compared to the risk-adjusted returns we generate. As demonstrated across multiple major economic disruptions, including the Great Recession, sequestration, the COVID shock and the recent rate hike cycles, our credit quality has remained exceptionally resilient. While we aren't immune from credit fluctuation cycles, our lifetime net charge-offs over 2 decades stand at just $12.6 million. This track record proves that our pricing model is highly efficient. We consistently capture the premium while our structural credit discipline limits actual credit losses incurred. On Slide 16, you'll see a deposit mix that is a direct reflection of our business customer-focused strategy. Quarter-over-quarter, we have continued to grow deposits while lowering the cost of those deposits. Given the intensifying deposit pricing pressure in our market, we are challenging our teams to pursue relationships with high-value deposits and to optimize relationship profitability. On Slide 17, I want to touch on our success of using wholesale deposits to supplement strong loan growth. We continue to see good loan opportunities as evidenced by our loan growth of over 4% in the second quarter alone. As we've done for many years, we fund strong loan growth with wholesale deposits and backfill those deposits with lower cost core funding. This strategy has been a successful way to grow our portfolio and maintain attractive margin. If you recall, our consistent net interest margin over the years from the previous slide. Slide 18 lays out our path for the remainder of the year, where our primary focus is capitalizing on our earning asset momentum. We are targeting 5% to 7% loan growth for the year. As we continue to drive top line revenue, we expect our operating costs to remain at current levels through 2026. Lastly, on Slide 19, we grew the book value of our shares by 9% year-over-year, primarily through the earnings power of the franchise. We have supplemented that growth by executing strategic share buybacks over that same time period. In the last quarter alone, we repurchased 207,000 shares at a price accretive to our shareholders. While we are focused on driving sustainable core earnings, the Board will consider future buyback opportunities when appropriate. At this point, I'll turn the presentation over to Tom Floyd, our Chief Lending Officer, to discuss our loan portfolio and loan performance.

Thank you, Alex. Over the next few minutes, I'm excited to guide you through our portfolio composition and highlight our key growth areas. I will also provide a closer look at our underlying loan characteristics and discuss our robust capital position. Finally, I'll give an overview of our classified and nonaccrual levels. Moving to Slide 20. Let's look at our portfolio structure, which remains well diversified. Year-to-date, we have grown the overall portfolio by 5%, a result driven entirely by organic relationship-first approach to banking. A major highlight of this growth is our owner-occupied real estate book, which expanded by $97 million over the last year as we continue to partner with strong local operating businesses. Additionally, we maintain excellent structural protections. 88% of our construction loans have a dedicated interest reserve held at the bank. Slide 21 provides a closer look at our government contracting portfolio, a sector where we are building traction. I'm pleased to report that our business development efforts are yielding strong results. This quarter, we onboarded several high-quality relationships, driving a substantial increase in outstanding balances quarter-on-quarter. Beyond asset growth, this portfolio continues to serve as an exceptional source of stable core deposits. We are also excited to welcome Oliver James, a key new addition to our team, who will help us capitalize on these opportunities and accelerate our positive momentum in the space. Moving to Slide 22, you will see that as our legal lending limit has grown, our average new loan size has remained relatively small. This highlights the strength of our market and that we are able to hit healthy growth goals while maintaining consistently low average loan sizes. By keeping our average loan size small and granular, we preserve pricing power and spread credit risk broadly across many different borrowers. Slide 23 illustrates the geographical dispersion of our construction portfolio. As you can see, the vast majority of our construction projects are within a 25-mile radius of our branch network. This regional concentration gives us a distinct advantage. Our team has firsthand knowledge of every submarket we lend in. We routinely inspect development sites, meet with project sponsors in person and assess asset progression to actively manage risk within the portfolio. Slide 24 highlights our capital resilience. We routinely stress test our balance sheet against severe economic downturn scenarios. Our pre-stress common equity Tier 1 risk-based capital ratio provides a massive cushion. Even after absorbing the losses modeled in the severe hypothetical scenarios, our post-stress capital ratio consistently finishes well above the 7% regulatory threshold of well capitalized. On Slide 25, we highlight our active workout efforts in our classified and nonaccrual loans. We currently manage $54.4 million in classified performing loans, $61.3 million in classified nonaccruals and $900,000 in other real estate owned assets. The takeaway here is we do not sit on these relationships. We manage them aggressively with a sharp focus on maximizing recovery, consistent with the historical performance shown on Slide 15. In summary, we're pleased to deliver a quarter of consistent disciplined performance marked by continuing growth in owner-occupied real estate and building momentum in our government contracting niche. Crucially, our robust stress testing demonstrates we remain strongly capitalized even in a worst-case scenario, and our classified and nonperforming assets are at manageable levels. We maintain our vigorous focus on timely, successful resolutions. We're confident that our disciplined relationship-focused approach positions us to deliver consistent performance and long-term value for our shareholders and the communities we serve. That wraps it up for our loan presentation. Back to you, Jeff.

Thank you, Tom. As you heard, the lenders have been busy working on new relationships, especially in the owner-occupied and government contracting space. The team is also working diligently to resolve nonperforming and classified loans. We've shared good news about the directional consistency of our net interest margin, expense control and earnings. We'll address questions that were submitted through the portal after we hear from Chris Marinac, Director of Research at Brean Capital. Chris, good afternoon. Chris, are you there with us? Chris... I apologize, we may be having some technical difficulties getting connected with Chris here this afternoon. While we're waiting, there is one question that was asked, what is the average price of the repurchased shares this quarter? We don't have that number in front of us, but we'll get back to you with this -- with that number, but they very much were accretive to book in all cases. Okay. Chris, are you there now?

Can you hear me?

There we are. Sorry about that.

All right. Well, thank you for having me. I appreciate it. And so I just have a few questions. Can you just talk further extending what Alex was talking about in terms of the deposit opportunity that you see? I know that pricing and pressures are there as he had mentioned. I'm just kind of curious on the kind of more macro deposit opportunity that you still see in your footprint.

So one of the things we were talking about quite a bit over the last couple of months is we are a branch-light franchise. And our -- the business banking team that we've had with us has been doing a great job kind of keeping us where we are with just a little bit of growth. And so we are in the process right now of bringing on a few more business bankers, we're going to -- we will continue to try to do that because we still think that there's some great opportunities to bringing on the small business customers that has a nice deep relationship where you get their operating accounts. And so the collective cost of funds is generally better than if you're just having to pay wholesale funds at the margin. So that's the best opportunity that we have. And so we've been successful in the past to bring on experienced business bankers that have good relationships, and that's what we're pursuing again.

Great. That's helpful. And then just a quick kind of credit question. Obviously, had good clean credit loss issue or stats this quarter. Just curious if we should expect to see more of the same in the near term or if we should budget just a little bit of loan charge-offs in general?

Chris, we don't have any losses identified at this point. Our 2 largest nonperformers are in the court system at this time, and they're working themselves through. I can assure you that we're doing everything we can to maximize collection, and we've got a great history of doing that. But those things are ongoing, and we continue to stay diligent in our focus to bring those to full resolution.

Yes. And I think beyond that, we are -- we don't have any plans to discount anything and send it out. But I suspect in order to get through the resolution of the book that we have right now that we will see a little bit of loss, what that is, I don't know. But I don't think it's going to be material for the entire outstandings that we have. But yes, it's hard to say at this point. So I don't think you'd be wrong dialing in a little bit, but I don't know what that size is. I mean, every day, we're trying to get close to what those numbers might be.

Okay. Not a problem. And then I had a buyback question. If I'm counting correctly, over the last, I think, 6 quarters, you've been able to take about 10% of the share count down. I presume the pace may be a little slower in the next 6 quarters. But just in general, your appetite is still to repurchase shares and you still have capacity to do so. I just want to confirm that.

Yes. I mean the capacity right now is throttled a little bit by the commercial real estate concentration. And so as we are able to continue to retain earnings and grow, we are trying to do less in the investor CRE space and more into the owner-occupied and the C&I space. And so as we're able to do that, Alex, I think the focus is going to be on buying back shares as long as there's -- it's prudent to do so.

Yes, that's right. We're just -- we're making sure we're keeping that balance, but we -- the buyback plan is active. We do have capacity. So we're always looking at that.

Got it. Okay. And then last question for me is just the tax rate. Should we be presuming the tax rate to stays kind of where it has been this last few quarters or anything different?

Yes. Yes. I would keep it constant here for the next couple of quarters, and then we can reassess that. It's a little bit elevated at the moment. Just we have a little bit of extra accrual in there. But yes, you can keep that consistent for the next couple of quarters.

I look forward to the next quarter.

Yes. Thank you very much, Chris. And it's nice having an analyst in the room because the average buyback was $24.09. So we have that one answered. The stress test analysis, we're doing it. We use an internal model, and it's one that I was really focused on building following the regulatory supervision. But from a conservative standpoint, one of the things I did when I was building, you make assumptions before you have the real data coming in and especially, we had 0 classified for the longest period of time. And ironically, this coming from a former regulator, hard to imagine, but the assumptions I made with regard to when assets get classified is, sort of, put the double jeopardy. That's one of the reasons you see a bit of a significant increase in the worst-case stress test. We've decided to leave that calculation alone until we get through this cycle, we'll be making some adjustments to it. I didn't want to make adjustments to it while we're sort of 2/3 of the way, 3/4 of the way through from a consistency standpoint. So you can be rest assured that, that is about as significant of a number. And based upon our historical performance, you shouldn't ever see the likes of that actually happening. The next question is regarding the timing of the existing nonperforming assets?

And to that question, it's -- as I mentioned, the 2 largest are in the court system, which unfortunately is moving a little slow, but we don't just rest on that. We look for opportunities to bring things to closure throughout those processes. And those things are, frankly, to predict right on the money, but it doesn't mean we don't stop trying to do that. So I think we're doing everything we can to get those down as quickly and as responsibly as possible to make sure we maximize recovery.

Yes. Again, it's at the hands of a judge that slows things down. There's also a question about the expected margin change in the second half of the year, assuming stable rates. Alex, do you want to take that?

Yes. Yes. No, great question. And largely, we expect the margin to hold constant with where you're seeing it today. We do have deposits that are going to reprice. And as I mentioned on the call that we are expecting some deposit pressures just given kind of what's happening in the environment and the market that we're in. But we also have a healthy amount of loans that are repricing at attractive rates. So you're going to have those offset the cost of deposits that are repricing. So you might see a couple of basis points shift here and there depending on the unforeseen things that happen. But in large part, we expect it to hold pretty constant.

Yes. We've got the -- our existing business banker team working very diligently to trying to find those good solid relationships that bring in some of those lower-cost operating accounts.

Yes. One thing I will just touch on just in the second quarter, being a business bank, we generally see a lot of our operating accounts, our low-cost operating accounts go out with the tax season. So we do see outflows there. It's expected a lot of that comes back. And one of the things I know we're really proud of is just the increase -- the incremental increase in our average noninterest-bearing deposits over time. So like that book is growing despite some of the seasonality of what business have to go through. So I know the team is working really hard to make that happen and continue to focus on that.

Yes, that's right. So there's one more question right now, and that is how much is left in the current buyback program?

There's about $5 million left in the current buyback right now.

Okay. And that can always be changed. And again, our buybacks will be, like I said, throttled for the immediate future based upon the concentration in commercial real estate, but earnings also augment that. So we're looking forward to some opportunities that's been good overall. Very much appreciate all of the questions that came in this afternoon. And as always, we're happy to take any conversations offline as well. We'll be in New York next week for the KBW conference. And we're always at the other conferences throughout the year as well, so including the Brean Capital when that one comes up. So we're looking forward to that. So thank you very much for your investment in us, and we will continue to do our best to get asset quality back to where we want it to be and continue to perform at these good numbers and look forward to talking with you.